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✦ FREE LEARNING — CLASS 11 & 12 — CBSE · PSEB — ACCOUNTS · ECONOMICS · BST ✦
Sumit purchased Amit’s business on 1st April, 2025. Goodwill was decided to be valued at two years’ purchase of the average normal profit of the last four years. The profits for the past four years were: year ended 31st March, 2022 ₹80,000; 2023 ₹1,45,000; 2024 ₹1,60,000; 2025 ₹2,00,000. The books revealed that: (i) an abnormal loss of ₹20,000 was debited to the Profit & Loss Account for the year ended 31st March, 2022; (ii) a fixed asset was sold in the year ended 31st March, 2023 and a gain of ₹25,000 was credited to the Profit & Loss Account; (iii) in the year ended 31st March, 2024, the assets of the firm were not insured due to oversight – the insurance premium not paid was ₹15,000. Calculate the value of goodwill.
Calculation of Normal Profit
| Year ended | Profit (₹) | Adjustment (₹) | Normal Profit (₹) |
|---|---|---|---|
| 31st March, 2022 | 80,000 | +20,000 | 1,00,000 |
| 31st March, 2023 | 1,45,000 | (25,000) | 1,20,000 |
| 31st March, 2024 | 1,60,000 | (15,000) | 1,45,000 |
| 31st March, 2025 | 2,00,000 | – | 2,00,000 |
| Total | 5,65,000 |
Average Profit = ₹5,65,000 / 4 = ₹1,41,250.
Goodwill = ₹1,41,250 × 2 = ₹2,82,500.
Accounting & Commerce Educator
Sarbjit Singh holds a B.Com and M.Com degree and has over 12 years of teaching experience in double entry bookkeeping, financial accounting, and business studies.
This guide covers "T.S. Grewal Class 12 Chapter 2 Q.7 - Nature and Valuation of Goodwill", focusing on key definitions, step-by-step concepts, applications, and revision guidelines relevant to Chapter 2 - Nature and Valuation of Goodwill.
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